Court of Appeal considers key requirements for an enforceable dispute resolution clause

The question

What form of wording and/or omissions in drafting may result in a Dispute Resolution Procedure (DRP) clause being held to be unenforceable?

The key takeaway

Courts will generally try to uphold a commercial agreement where possible. However, if the DRP clause is not sufficiently clear and certain, then it is liable to be held unenforceable.

The case

Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd [2023] EWCA Civ 292

The background

In 2004, the Children’s Ark Partnership (CAP) entered into a contract with the Brighton and Sussex University Hospital NHS Trust to redevelop the Royal Alexandra Hospital for Sick Children in Brighton. Schedule 26 of the contract set out the dispute resolution procedure (DRP) between the parties.

On the same day, CAP entered into a contract with Kajima Construction where Kajima was engaged to design, build and commission the hospital (the Construction). The Construction Contract stipulated that proceedings were not to be brought against Kajima after the end of a 12-year period from the ‘Actual Completion Date of the Works’. The works were originally completed in 2007 so the limitation period expired in April 2019.

CAP alleged that there were defects in the design and/or construction of the hospital. In late 2018, Kajima agreed to conduct remedial works. A standstill agreement between the parties was agreed extending the limitation date and expressly referring to the DRP set out in Schedule 26.

After a breakdown in the relationship between the parties and without first submitting to the DRP, CAP issued proceedings against Kajima. In response, Kajima applied for CAP’s claim to be set aside or struck out due to CAP’s lack of compliance with the DRP. In particular, CAP had not sought to refer the dispute to a ‘Liaison Committee’, as required under Schedule 26. Kajima claimed that the referral of the dispute to the Liaison Committee was a condition precedent and CAP’s failure to do so meant the court had no jurisdiction over Kajima.

At first instance, the court found that the DRP provided for in the contract was not enforceable because:

• The DRP did not contain a “meaningful description” of the process to be followed.
• There was no unequivocal commitment to engage in any particular procedure. Kajima was not a party to the Liaison Committee (but could be invited) so Kajima was not obliged to take part in the process, consequently it was impossible to see how the process could be said to provide a means of resolving disputes or disagreements between the parties amicably.
• It wasn’t clear how the dispute should be referred to the Liaison Committee, in fact the parties did not agree that the issue had in fact been referred to the Liaison Committee.
• It was unclear whether any decision of the Liaison Committee would have a binding effect on Kajima.
• It was not clear when the process of referral to the Liaison Committee came to an end (ie whether resolution or a decision was required before litigation could be commenced), so it was unclear when the condition precedent was satisfied.

The court rejected Kajima’s application and Kajima appealed to the Court of Appeal.

The decision

Agreeing with the lower court, the Court of Appeal dismissed the appeal.

Referring to a number of authorities on general principles relating to enforceability of DRP clauses the court emphasised that wherever possible, the court should endeavour to uphold the agreement reached by the parties. However, where there is a dispute about the enforceability of alternative or bespoke dispute resolution provisions which are being relied on to defeat or delay court proceedings, the courts will be prepared to find that these provisions are not enforceable, because clear words are needed to remove the jurisdiction of the court, even if only on a temporary basis.

The Court of Appeal found that Kajima’s absence from the Liaison Committee, their lack of ability to see documents and make representations, together with the Liaison Committee’s inability to resolve a dispute amicably or provide a decision binding on Kajima made it “fundamentally flawed”.

The parties making up the Liaison Committee had interests contrary to Kajima’s, resulting inevitably in actual or apparent bias in any dispute resolution procedure.

The Court of Appeal also agreed with the lower court on its finding that under the DRP in Schedule 26, it was not clear when the condition precedent might be satisfied.

Why is this important?

Where there is an enforceable DRP clause in a contract, but a party has declined to activate that clause and instead has commenced proceedings, a court will usually stay the proceedings until the dispute resolution procedure has been completed. In this case, if Kajima had been able to rely on the dispute resolution procedure being found to be a condition precedent to court proceedings, they may have been successful in striking out CAP’s claim and not just staying it. On the facts, any fresh claim against them would have been outside the limitation period

However, Kajima failed to do this because the dispute resolution clause was not drafted to be sufficiently clear and certain as to the obligations of the parties in the event of a dispute. It did not adequately provide for when the obligations were to be triggered or whether or not they were to be followed before proceedings could be begun.

Any practical tips?

When drifting an DRP clause, you should ensure that:

• There is an unequivocal commitment to engage in a particular dispute resolution procedure.
• There is a meaningful description of the process to be followed.
• The order of the process is clear, including what triggers it and how it is satisfied.
• Details of the (senior) representatives who have knowledge of the agreement/ project and will be key in resolving the dispute are included.
• It includes set time periods for serving the notice of request and for completing each stage before the parties move on to the next stage.
• It specifies what stages of the process must be completed before litigation can be commenced (except perhaps in certain circumstances, such as where the limitation period would expire during the process or where urgent relief is required).

Summer 2023